Proverbs 22:7 states, “The rich rules over the poor, and the borrower is the slave of the lender.” This simple scripture verse reminds us of the dangers of overusing credit. Credit can be the best friend or best enemy of a person. It gives one the ability to access goods or services with the understanding of paying later. However, it can bury a person in debt and make them beholden to lenders that need to collect the money owed to them.
Credit is a commonly used term in daily life; however, many people do not know the definition of it. Credit is the ability to borrow money or access goods and services with the understanding that you will pay later. Creditors, made up of lenders, merchants, and service providers award credit based on their confidence that a person can pay back what is borrowed. Good credit is needed when looking to purchase a home or a car.
Credit limits are the amount of money available to finance a purchase. Many consumers falsely believe that they should use the entire credit limit. There is an important term everyone needs to be familiar with and it is “credit utilization rate.” This term is the ratio of a person’s credit card debt to credit limits. For example, a client may have a $800 credit limit and have spent $600 of that. Their credit utilization rate is 75%. This will likely decrease this person’s credit score and indicate to creditors they are less trustworthy. A good rule of thumb is to rarely use more than 30% of the total credit available to you. Doing this will give you the financial freedom and peace of mind to continue to make sound financial decisions
Applying for a Credit Card
Credit cards are an important tool to help an individual purchase a home, car, or take out large loans as they can help build the credit score if used wisely. When applying for a credit card, it is important to keep these five factors in mind: quality of credit, APR, annual fees, rewards and benefits, and hidden fees. Quality of credit involves checking the credit score and obtaining a credit report for the individual. Lenders will use this information to set the terms of the credit card, so it is important to know this information. Annual Percentage Rate (APR) is the interest rate for a credit card and applies when an individual carries a balance from month to month. Annual fees come with certain credit cards, but many cards have none. Make sure to way the options to see if there is any extra benefit to the credit card with the annual fee vs. the credit cards without annual fees. Rewards such as cash back and airline miles make it attractive to purchase a certain credit card. Hidden fees are often hidden within the fine print of the text in a cardholder agreement. Do yourself a favor and read everything! Research, research, research!
There are several options in building credit at whatever stage a person is in life. A student credit card may be appropriate for a college student with a history of credit. A student credit card is typically used to charge a normal expense (gas, cell phone, etc) and paying it off each month. There is typically no annual fee and a small credit limit. Paying off the entire balance each month and keeping the credit utilization rate below 30% will allow for maximization of an individual’s credit score. A secured credit card may be appropriate for a person with no credit history. A secured credit card limit depends on how much money a person has in the account backing it up. This is the safest way to build credit.
Keep in mind that every person’s situation is different! These are only tips on how to go about certain things regarding credit. This is by no means a prescription to solve all your credit problems; it is simply a guide to become a better steward of credit.